AI Risk Indicator 2022 Review
3 Minute Read
Summary
Qraft Technologies’ AI Risk Indicator forecasts risk in the U.S. equity market for the coming week using our proprietary AI models, allowing investors to position their equity portfolio for expected risk using our easy-to-interpret scoring methodology.
AI Risk Indicator draws signals from over 70 different macroeconomic metrics, in large part assessing momentum, volatility, and correlation features.
By following Qraft’s AI Risk Indicator as a combination of SPY and cash aligned with the weekly AI Risk Indicator score, investors would have seen a hypothetical outperformance of 5.10% in 2022 and a 6.55% lower standard deviation compared with only holding SPY.
Over 2022, the most prominent feature in the weekly score was the U.S. equity one-month momentum, which was 3% higher in 2022 than its average importance over the prior 20+ years.
Developed by Qraft Technologies, the AI Risk Indicator forecasts risk in the U.S. equity market for the coming week using our proprietary AI models, allowing investors to position their equity portfolio for expected risk using our easy-to-interpret scoring methodology.
The AI Risk Indicator can be actioned in one’s portfolio by aligning the weekly score with the cash allocation in the equity portion of the portfolio. For example, if the weekly score was 8, then an investor could adjust the equity portion of their portfolio to be 8% cash and 92% equities. Using the indicator in this way has proven to be effective over the last 11 months as seen in the chart below.
Source: Qraft Technologies, Bloomberg. Rebased to 100. US Equities reflects returns for SPY. AI Risk US Equities reflects a combination of SPY and cash aligned with the weekly AI Risk Indicator score. Past performance is not indicative of future results. Real results may vary.
Going back to the AI Risk Indicator model inception in November of 1999, we see similar effectiveness over time periods that included a number of shocks, ranging from the Global Financial Crisis in 2008 to the US credit rating downgrade in 2011 to COVID-19 in 2020, just to name a few. Importantly, over these longer-term periods we see the AI Risk Equities portfolio experienced significantly lower volatility.
Source: Qraft Technologies, Bloomberg. US Equities reflects returns for SPY. AI Risk US Equities reflects a combination of SPY and cash aligned with the weekly AI Risk Indicator score. Past performance is not indicative of future results. Real results may vary.
Features
The AI Risk Indicator draws signals from over 70 different macroeconomic metrics, in large part assessing momentum, volatility, and correlation features. With the weekly Risk Indicator score, the model also produces the importance of each feature in deriving the score. The chart below shows the average percentage of the top 5 features in the calendar year 2022.
Over 2022, the most prominent feature in the weekly score was the U.S. equity one-month momentum. The short-term treasury volatility was also a key feature, driven by the Federal Reserve interest rate hikes. In a year of record inflation from supply constraints and geopolitical conflicts, commodities volatility was another important feature in the indicator’s score.
When comparing this year’s average feature importance to the average feature importance from all prior years (2000 to 2021), we can see how 2022 has differed from the past.
For example, the average importance of the U.S. equities one-month momentum feature was over 3% higher in 2022 than its average importance over the prior 20+ years. Conversely, the U.S. short-term treasuries and commodities correlation feature were over 2% less important compared to average measures for the previous 20+ years.
AI in Asset Allocation
The AI Risk Indicator was designed to help investors respond to markets objectively. Using the AI Risk Indicator as a cash allocation strategy in an equity portfolio has been shown to help manage downside risk, and, importantly, assist in knowing when to re-enter equities to participate on the upside.
The results seen – both backtested and the live use case beginning in 2022 – from following the weekly AI Risk Indicator showcase the power and accuracy of Qraft’s weekly market risk prediction.
This material has been prepared by Qraft Technologies, Inc. This material is intended for the exclusive use of the person to whom it has been delivered by Qraft Technologies, Inc.
This material does not constitute an offer to sell or the solicitation of an offer to buy any security or to enter into any agreement and Qraft Technologies, Inc. is not soliciting any action based upon this material.
The material is based upon information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon as such. Consequently, we accept no responsibility or liability for the accuracy or otherwise of such information.
Opinions expressed are our current opinions only, any historical prices or values are as of the date indicated, and we accept no responsibility to update any of the information contained in this material.
No part of this material may be (i)copied, photocopied, or duplicated in any form, by any means, or (ii)redistributed without Qraft Technologies, Inc.’s prior written consent.
You should not rely on any of the information contained herein and you must obtain your own independent investment, financial, strategic, legal, regulatory, accounting and tax advice from your professional advisors.
Further information on any of the contents mentioned in this material may be obtained upon request, and for this purpose should contact Qraft Technologies, Inc.
Copyright 2022 Qraft Technologies, Inc. All rights reserved. Qraft Technologies, Inc. prohibits the redistribution of this material and accepts no liability whatsoever for the actions of third parties in this respect.
All communications and inquiries relating to this document and a possible transaction or partnership should be directed solely to Qraft Technologies, Inc.
Related Articles
